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1) Financial institutions that cut back on their lending are engaged in ________. A) liability management. B) deleveraging. C) financial innovation. D) torsion control. 2) The main objective of financial liberalization is ________. A) to encourage financial innovation B) to improve the allocation of financial capital C) to discourage volatility in financial markets D) to reduce the likelihood of a credit boom 3) Prior to World War II, in the United States, financial crises occurred every ________ years or so. A) twenty B) seven C) fifty D) three 4) In the period from 1929 through 1933, there were successive ________ in aggregate demand and ________ in short-run aggregate supply. A) increases; decreases B) decreases; increases C) decreases; no change D) increases; increases 5) The failure of a major financial company is often a trigger for a financial crisis. The main reason for trouble at a single firm to become a crisis for the entire economy is that ________. A) the central bank will suspend operations until the failed firm is restructured B) it is unclear whether the firm’s collapse will remain an isolated event C) customers of the failed company will organize a boycott to protest their losses D) employees and owners of the failed company reduce their spending, with adverse effects on other businesses 6) An early sign that financial innovation might be leading toward a financial crisis is ________. A) deleveraging B) a bank panic C) a credit boom D) debt deflation 7) The adverse consequences of debt deflation are most evident ________. A) in the expansion of credit to high-risk borrowers B) on the balance sheets of nonfinancial businesses C) in a sharp decline in the real interest rate D) on the balance sheets of financial businesses 8) ________ refers to a decrease in the willingness of banks to lend, while an impairment of the ability of nonfinancial firms to borrow is a consequence of ________. A) Adverse selection; moral hazard B) Deleveraging; debt deflation C) Fire sales; a bank panic D) The shadow banking system; agency theory 9) A rapid increase in the availability of credit to previously underserved borrowers is likely ________. A) to result from financial liberalization B) to improve the allocation of capital C) to confirm the merits of microcredit D) to result from deleveraging 10) A likely consequence of deposit insurance, ceteris paribus, is ________. A) an increase in risk-taking by banks B) a bank panic C) a credit boom D) a reduction in the severity of adverse selection

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